Text carried on or coded against a certificate stating that the shares may not be transferred except in compliance with the securities laws. While the legend stands the certificate is not negotiable, so removal requires the issuer's satisfaction, usually evidenced to the transfer agent by counsel's opinion.
Practice questions using Restrictive Legend
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
A certificate deposited with a broker-dealer bears a restrictive legend. What does the legend do to the certificate as an instrument?
A.It makes the certificate void until the issuer replaces it with an unlegended one.Wrong. The instrument remains valid evidence of ownership; only its ability to be transferred is constrained.
B.It reduces the certificate to bearer status, so possession alone controls.Wrong. The shares stay registered stock, and a printed notice has nothing to do with how title is evidenced.
C.It makes the certificate non-negotiable, so it cannot be transferred or delivered against an ordinary sale.Correct. Putting the transfer agent on notice is what removes the paper from ordinary circulation.
D.It has no effect on the certificate, since only the conduct of the holder is restricted.Wrong. The notice is printed on the instrument precisely so it binds the transfer agent as well as the holder.
Why: A restrictive legend is a notice printed on the face of a certificate stating that the shares may not be resold unless the sale is registered or an exemption is available. Its operational effect is to make the certificate non-negotiable: the transfer agent, seeing the legend, will not process a transfer, so the certificate cannot be used to satisfy a sale or fed into the ordinary settlement stream. The shares remain validly owned and the certificate remains valid evidence of that ownership. The restriction is on movement, and it is lifted only when the legend itself comes off.
A customer of Bramwell Clearing has satisfied every condition for resale and asks the firm to have the restrictive legend taken off her certificate. Who can actually remove it, and on what basis?
A.The control-stock desk of the broker-dealer, once it has documented that the resale conditions are met.Wrong. The firm can assemble the paperwork but has no power to alter the certificate itself.
B.The Commission, on an application showing that the resale conditions are satisfied.Wrong. No such application exists, and the agency does not adjudicate questions of this kind.
C.Counsel to the customer, by delivering an opinion letter directly to the broker-dealer.Wrong. An opinion from the lawyer of the seller does not supply the consent the transfer agent needs.
D.The transfer agent, and only after the issuer consents, usually through an opinion of counsel to the issuer.Correct. Authority over the certificate sits with the agent, and the issuer supplies the permission to act.
Why: Meeting the resale conditions is necessary but not sufficient, because the certificate still carries the legend and only the transfer agent can remove it. The transfer agent will not act without the consent of the issuer, which is normally given as an opinion letter from counsel to the issuer stating that the legend may come off. Until that happens the agent has no authority to remove the legend or to permit the trade to be executed in the marketplace. The role of the broker-dealer is to route the request and hold the position until the agent acts.
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